Equity crowdfunding legislation has finally been given the tick of approval by the federal Parliament, after more than two years of industry consultations, government deliberations and debate.
The Corporations Amendment (Crowd-sourced Funding) Bill 2016 passed through the Senate on Monday with agreement from the opposition, after Labor senator Katy Gallagher put forward two amendments related to the cooling-off period for investors and eligibility for a wider range of startups and small business.
With support from the Greens and the Nick Xenophon Team, the cooling-off period was changed from 48 hours to five business days.
However, Labor’s request to change one of the conditions for eligibility from a “public company limited by shares” to “the company has an agreement with a CSF [crowdsourced funding] intermediary that is legally enforceable” did not go through.
The legislation is expected to come into effect in the next six months, opening up the market of high-growth ventures to retail investors.
“We’re relieved because it’s a really good start,” FinTech Australia chief executive Daniell Szetho tells StartupSmart.
“We’ve been lobbying for this change since almost 2015.”
While the final bill is “limited in scope”, Szetho says its passing through the Senate means regulatory bodies like the Australian Securities and Investments Commission can start developing frameworks for a range of small to medium enterprises to access new capital through crowdfunding.
In February this year, shadow minister for the digital economy Ed Husic told StartupSmart he believes a key problem with the equity crowdfunding bill is that it excludes more than 99% of small businesses and startups in Australia.
But Szetho believes the legislation will actually “help a whole new group of companies”, not just startups.
“It’s very easy for the startup community to become very self-focused,” she says.
“It’s not really targeted as much to startups, which are all usually private companies.”
With the Australian Securities Exchange’s “sweet spot” usually companies with a market capitalisation of between $50 – 500 million, Szetho says, there are numerous other smaller businesses who need investment to launch their next phase or expand into new markets, but would be burdened by the “onerous” process of undertaking an initial public offering.
Equity crowdfunding will be transformative for these business, she says, especially, considering the burgeoning demand from around the world to invest in Australian early-stage and small and medium businesses.
“There’s very strong retail investor demand,” she says.
“[There] is a rich and deep investor pool for us to take advantage of.”
Concerns with cooling off
However, Szetho says Australia is one of the only jurisdictions in the world to include a cooling-off period in its equity crowdfunding arrangements and she’s concerned it may be harmful.
“The five day period is too long,” she says.
Szetho says even a 48-hour cooling-off could give deceitful investors time to band together and manipulate the system by backing a venture and pulling out later, which could have a significant negative impact. While the chance of this happening is marginal, she says, it is concerning.
“The ideal situation is not to actually have a cooling-off period,” she says.
“The argument is that retail investors who aren’t necessarily used to investing in this asset class can change their mind.
“By the time retail investors have put funding in they should have done their due diligence and made up their mind as to whether the investment was right for them. They shouldn’t be able to pull out of an investment after it has closed just because they change their mind.”
In coming months, Szetho says FinTech Australia will be working with various accounting bodies to ensure they’re across the upcoming changes and she recommends retails investors start familiarising themselves with credible crowdfunding platforms that have a deep understanding of the legislation and have played a key role in lobbying for the bill.
“I would definitely get them to have a look at some of the platforms that have been leading this charge,” she says.
One of these companies is Equitise, which recently launched a dual investment platform due to delays with the equity crowdfunding legislation.
“All we need is some sort of framework to go up and then we can evolve it,” Equitise co-founder Chris Gilbert told StartupSmart earlier this month.
Crowdfunding platform founders get set
In a statement, fellow Equitise co-founder Jonny Wilkinson said his team will continue to monitor the market and do “everything we can to run a fair and orderly process for investors and companies”.
“We are continuing to work closely with government and Treasury to come up with a framework for proprietary companies to access equity crowdfunding too and are excited by the future of the industry,” says Wilkinson.
Melbourne-based crowdfunding platform Pozible, which is used in over 100 countries, has been anticipating the legislation since industry consultations began.
Speaking to StartupSmart in 2016, Pozible co-founder Rick Chen said the platform would be looking to make equity crowdfunding possible on its platform once legislation passed.
This morning, Pozible co-founder Alan Crabbe said the Pozible team believes “the requirement to be a public company will not pose a major issue for many”.
“However, it’s encouraging that the minister of finance Mathias Cormann has stated yesterday that making equity [crowdfunding] available to propriety limited companies is still a priority,” Crabbe says.
“Equity crowdfunding has been on our roadmap for over three years, in part due to our observation of overseas crowdfunding markets, but also because many of our existing customers who got their ideas off the ground with Pozible have reached the second phase of their business development and would like to fund their expansion through crowdfunding.”
*This article was updated on March 23, 2017.
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